Anonymous S, July 2013 Net Worth

In Naked With Cash, seven anonymous Consumerism Commentary readers publicly track and analyze their finances on a monthly basis. For almost a decade, I tracked my own finances on Consumerism Commentary; now I’m sharing the benefits of public accountability with the participants. I’ve partnered with financial planners who will offer some guidance along the way. Read this introduction to learn more about the series.

Anonymous S is a 24-year-old engineer earning $67,000 a year plus bonus. He also builds websites on the side for an hourly fee of $20 to $35. Read his bio here. Anonymous S is on Team Roger, with Certified Financial Planner Roger Wohlner.

Keep reading to see how Anonymous S progressed throughout the month of July. (You can read June’s update here.) This month, the participants are focusing on education. Following his net worth report own analysis, Anonymous S will be able to read feedback from Roger.

Anonymous S analysis and comments

In July I continued to settle into my new lifestyle. Monthly spending decreased dramatically, and I was able to save (and invest) a decent chunk of my income. To invest, I put excess discretionary money into a low-cost index ETF at Vanguard. Once I get to the equivalent mutual fund minimum, I will convert my ETF shares to mutual fund shares. Compared to June, food spending was cut by 31%. I expect to be able to lower that even further in August, since I found local farmer’s markets close to home.

In July I also started selling the I-Bonds I purchased last year. They don’t fit my overall risk/return policy, and I would rather put that money into the market. The 1.76% return on I-Bonds isn’t that attractive. With a 30+ year horizon to look at, investing in the market seems a much better idea. I still keep a healthy buffer in my checking account, and feel very certain about my career. In August, I plan to redeem more of my I-Bonds in order to invest in riskier assets with higher expected returns. While I will miss out on three months of interest due to the early redemption, I don’t think it will make much of a difference in the long run.

Although I will be redeeming a large amount of I-Bonds, I will hold on to my other savings bonds, all of which earn 4% or higher. This still leaves me with significant liquid assets in case of emergency, and the interest rate is better than I can get with a checking account.

Credit card balances still appear high since they are on auto-pay and the due date hasn’t come yet.

Another friend told me that he is buying a condo. This is the second of my friends to buy a condo, and both have “parental help.” Each one is splitting the down payment with parents, and paying “rent” to them until it is paid, along with paying the mortgage and fees. This is great for them, and it can be difficult to stay content “throwing money away” on rent while others are building equity. However, I am glad that I am much more flexible in living arrangements if I have to move in a couple years. There are multiple reasons for and against owning a house, and sometimes it’s difficult to not see the greener grass on the other side.

This month’s theme is college and education planning. I don’t have too much experience in this area, since I was fortunate enough to have my parents pay for four years of college. I’m not yet thinking about saving for a child’s college expenses, but I did start a 529 in case I want to get an MBA. However, it seems more and more like I will not need an MBA to advance in my career, and I will likely transfer the 529 to a child when it’s appropriate.

There is a negligible amount in the account, so I wouldn’t be upset if I lost it. When I do have kids, I would love to be able to provide a debt-free college experience. While there are debates about how much college is appreciated by those who don’t have to sacrifice financially for it, there is no debate about how it feels to have debt afterwards. Someone I know did have strings attached to her education, in that her parents would only pay if she studied STEM, business or medicine. She studied engineering.

Feedback from Roger Wohlner, CFP

Kudos on starting the investment into the Vanguard ETF. Before converting the ETF to a mutual fund I would compare the relative costs. Often Vanguard ETFs are less expensive than all but their various institutional share classes.

At this point in your life I agree with the decision to rent vs. buying, since it provides the level of flexibility and mobility that someone your age and at your stage in your career needs.

We have three kids ranging in age between 20 and 25. We have been fortunate that two of them attended elite private universities and were the recipients of substantial aid and scholarship dollars. One had no debt, and the other had minimal debt. The younger of the two girls is starting law school as I write this and will be financing that herself. Our youngest is a junior at a state university here in Illinois and so far has minimal debt as well. As parents we feel that every cent we’ve spent on their educations is an investment in their future.

Feedback from Luke Landes

You’ve made some great progress this year. It’s exciting to watch your assets increase month after month.

Starting with index ETFs at Vanguard is a great idea. I’m not a fan of ETFs for myself, though. Prices change throughout the day, like stocks. I don’t think I’d be tempted to trade ETFs on a minute-by-minute price, there’s more than a little chance of each purchase coming with a tinge of regret — had I waited five more minutes, I would have received a better price. The same could be said about buying mutual index funds, so it may not be an important concern. The bottom line is you need to accumulate a minimum first before investing in the mutual funds at Vanguard, and an ETF lets you start immediately instead.

Regarding fees, the expense ratio for VTI, the Vanguard Total Stock Market Index ETF, is 0.05%. The corresponding index mutual fund, VTSMX, has an expense ratio of 0.17%. It appears the ETF offers the better deal, but the ETF fee doesn’t take into account the bid-ask spread, which is built into the price of every stock (or ETF) on an exchange — a difference between the immediate selling and buying price which guarantees a profit for the broker with every trade.

I understand the pressure you feel from friends about buying a house. Keep in mind that while your friends will need to pay thousands of dollars every year to maintain and operate their homes, money that is completely lost, like investment fees, and while they’ve paid fee upon fee to be given the right to borrow money to pay for their houses, you’re saving money at every turn. It helps to remember that if you add in all the fees that house buyers, owners, and sellers must pay rather than just subtracting the purchase price from the selling price, that “investment” will not likely break even.

Perhaps sometime in the future buying a house will be the right decision for you, but until then, enjoy the freedom you have while renting.

If the obligation of paying the rent is month-to-month then you are correct in saying it is not part of the liability page—-if however it is a lease of let say 2 years then the unpaid balance of the total rent is a liability. Where does it say in the narrative that Anonymous does or does not have a car or if there is a car it is paid off.

I think the cost to break the lease as a liability is more accurate than the remaining lease amount. Since most rentals i’ve seen don’t have a seperate early termination amount but have you pay last months rent upfront the potential liability has already been paid. Otherwise you should include any expected security deposit you expect to receive back as an asset. To me that level of detail is immaterial to one’s financial health.

The cost to break the lease is an unknown. The security deposit (last month up front) is for damages inflicted to the premises. The standard lease agreement stipulates that if broken by the occupant all remaining payments are due and payable. I’ll be the first to stipulate that a settlement can be reached which is another unknown. This is why from an accounting point of view the unpaid balance of the monthly rents must be listed on a balance sheet as a liability.

qixx ♦1,905 (Half-Dollar)

Around me first, last and security deposit are all paid upfront. You loose the last month for early termination. Things may be different because there is a lot of Military families here. At school the law limited rent signing to first plus 1/2 last plus security deposit (that can be at most 1/2 month rent). You were also limited to claiming more than the security deposit for damages without filing in small claims court.

Anonymous S

No car.

Balance of apartment lease is not generally included in net worth calculations since it is not a *real* liability such as debt. I think you’d be hard pressed to find any other net worth calculation with apartment costs factored in.

To address Luke’s comments I don’t use ETFs as a trading vehicle but rather as a long-term client holding. You are right about bid-ask spreads in some ETFs, but the Vanguard ETFs generally have a pretty narrow spread that in the long run should make no difference to a long-term investor. Vanguard is the only firm that runs their ETFs as another share class of the corresponding mutual fund. It’s all about owning the cheapest share class available in this case.

I use ETFs as a way to save up for the minimum deposit on a mutual fund. With Vanguard, buying and selling ETFs is a much more involved (and manual) process than buying mutual funds, so I like to own mutual funds even if it means a tiny bit higher expense ratio. Once I hit the $3,000 minimum, I sell the ETF and buy the mutual fund. Once I hit $10,000 in the mutual fund, the ER matches the ETF so it doesn’t matter. Additionally, Vanguard only allows automatic investments into mutual funds, and not ETFs.

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About Luke Landes

Luke Landes founded Consumerism Commentary in 2003 and has been building online communities since 1990. Luke has contributed to PC World Magazine, US News, Forbes, and other publications. Read more about Luke and about Consumerism Commentary.

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